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Business Ethics

THE ETHICS OF FINANCE

Presented by:

Mohammad Bilal

Raza Ayoub

Syed RIzwan Ali

Zohair Ahmed Sariyo

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Salient Features

Introduction (THE ROLE OF FINANCE)

Investment Ethics

Corporate Corruption & Governance

Individual Financial Corruption

Conflict of Interests Fraud & Theft Insider Trading

The Two Islamic Perspectives

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Investment Ethics

Capitalist order has a conception of what is good

Capitalism is concerned with the maximization offreedom

Freedom for Kantians is liberty

For utilitarians it is welfare

Good life can be achieved through rationality andreason

Aristotelians argue that there is a social cost andsacrifice of virtue

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Enron violated the principle of the best interests of thecorporation.

Enrons executives were cheating its shareholders and thecorporation is an instrument for the maximization of

shareholders value.

That is why the corporations are need to be governed andregulated by the capitalist state through law.

Investment Ethics (Cont)

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Investment Ethics (Cont)

Investors within capitalist order behave ethicallywhen:

o They seek the maximization of long run profit forthe corporation in which they invest.

o Take appropriate account of social,

environmental consequences likely to impact onthe long term profitability of the corporation.

o Obey laws established by the capitalist state.

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Corporate Corruption

Corporations behave unethically when they seekthe maximization of their profits in violation of therules that legitimately constrain profit maximizingbehavior within the capitalist order.

It is extremely difficult to avoid unfair marketmanipulation and unethical price fixing in practicefor the true fair price is unknowable.

The immorality of price fixing is an unavoidable sinin mature capitalist order.

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Corporate Corruption (Cont)

It has been argued that corporation do not have theresponsibility of maximizing the general welfarewithin capitalist order, it is the responsibility of the

capitalist state.

Therefore, corporation cannot be said to be actingunethically if it employs child labor in a country suchas Pakistan, where it is legal to do so.

If corporations decide not to employ child labor thanit will only be ethical if it contributes to themaximization of profits.

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Corporate Laws

The laws corporations should follow:

o They must respect human rights even when

capitalist governments violate them and non-

capitalist governments legislate against them.

o They are not ethically obliged to practice/provide

welfare rights when a capitalist government

does not require them to do so.

Therefore, corporate corruption may thus be

defined as either violation of human right and/or

violation of laws sanctioned by capitalist states.

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Corporate Corruption (Cont)

Regulations tend to reduce profits, thereforecorporations have started giving donations topolitical parties.

We are dangerously close to the co-option ofgovernment by corporations (Deitz).

Charters of major corporations are never revoked,only small and weak corporations suffer this fate.

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Corporate Governance

After the revelation of serious scandals in leadingmultinational companies, attention was focused onthe need of strengthened corporate governance.

However, it had to settle with liberalization,privatization, and de-regulation.

Regulation is an unnecessary barrier to trade inservices. (WTO)

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Individual Financial Corruption

Business Ethics basic focus is to promote

Corporations

Corporate Crimes

An employee & the Corporation

An Example (Financial Managers) Ethics & Legal Status

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Conflict of Interest

Bad Faith:

When an employee has a self-interest in theoutcome of a task that he is performing for the longrun profit of the Corporation

An employees power to indulge in the acts of bad faith is

significantly dependent upon the type of job and the financialaccess the employ has in the Corporation.

These acts of Bad Faith are definitely unethical (irrespectiveof being legal or otherwise).

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Conflicts of Interests

These acts of Bad Faith are often tackled by Rules

& Regulations

These Rules & Regulations prohibit the

employees to: Maximize Self-interest at the cost of the

Corporations Interest

Bribe Disallow acceptance of gifts (in fear that it may

lead to unethical behavior)

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Conflicts of Interests

Why & Where do these acts of Bad Faith takeplace?

The feel of the job being unimportant The struggle for the maximization of self-interest The Bureaucratic Organizations

What are the measures taken by the organizationsto stop such acts?

Promotions Empowerment of Role Models

Special Incentives

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Fraud & Theft

Fraud:

Act of deception which intentionally imposesmaterial injury on a specific victim.

Who commits fraud?

Fraud can only be committed by a person who

has a right or authority to certain assets of the

Corporation.

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Fraud & Theft

How are frauds controlled then?

Internalization

Motivating the employees in the higher authority Audit & Risk Management Systems Special Incentives Punishments

Do these measures bring frauds to a complete halt?

Almost Yes!! But there is very little that can be done for thenegatively motivated ones.

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Fraud & Theft

Theft:

Stealing or misuse of property in this case the Capitalist

or the Corporations property

What is treated as property?

Funds Equipment Machinery Fuel etc. & The Information

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Fraud & Theft

Why Information is treated as the Corporationsproperty & does not share it?

Corporations prefer not to share information because it hasproduced information itself

How is the information kept safe? Patents Copyrights

Sharing this information & giving out the strategicplans & records with other corporations isconsidered unethical.

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Insider Trading

Insider Trading:

It is the trading of information (about a corporation) that is notavailable to the general public.

Example: Managing Director as an Inside trader

This mode of trading is extremely unethical & illegal.

Why is it unethical & illegal?

This is considered unethical & illegal because it violates the propertyrights and conceals information form the general public (who isthe one suffering the greatest losses) and since the insider is notthe owner of the information so he has not rights to sell it out.

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Insider Trading

What are the Disadvantages that InsiderTrading brings?

It reduces the liquidity of the stock market i.e.the shares that do not increase in terms of priceare not traded frequently.

Risk & costs become different for variousstakeholders on the basis of Insider information.

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Insider Trading

Could it be curtailed?

Yes, it could be curtailed through strict vigilance,Laws & State Policy but it can not be completely

eliminated since it is very difficult to find out the

inside trader and to punish him.

Example: The KSE Crisis of March 2005

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The Islamic Perspectives

The Orthodox Approach

Does not consider the capitalist system at all acceptable.

It rejects both Interest & Speculation as they are the mainingredients of Capitalism & Accumulation.

Rejects the Capitalist Property form completely. Promotes ideas such as Fuqr, Ghina, Sabar, Shukar etc. Restricts a person not to choose professions based on

Interest & Brokerage. Encourage to spend the least possible time in the

marketplace. Greatly discourages Competition & Acquisitiveness. Promotes Charity in the Way of God.

In a nut shell It completely rejects Capitalism.

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The Islamic Perspectives

The Revisionist Approach Partly accepts the Capitalism as natural & rational. Support Islamic legitimacy of holdings such as shares,

bonds & banking. Provides Islamic Banking as an alternative for the

Conventional Banking (with a little or almost negligibledifference)

Provides with alternatives for Interest earnings withmurabaha.

On the whole Islamic Banking is rising & Revisionistsare becoming more & more liberal.

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Queries & Confusions

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Thank You